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Chapter 10

Chapter 10. Managing Political Risk, Government Relations, and Alliances. Managing Political Risk, Government Relations, and Alliances. The specific objectives of this chapter are to EXAMINE how MNCs evaluate political risk.

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Chapter 10

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  1. Chapter 10 Managing Political Risk, Government Relations, and Alliances

  2. Managing Political Risk, Government Relations, and Alliances • The specific objectives of this chapter are to • EXAMINE how MNCs evaluate political risk. • PRESENT some common methods used for managing and reducing political risk. • DISCUSS strategies to mitigate political risk and develop productive relations with governments. • DESCRIBE challenges to and strategies for effectively managing alliances.

  3. The Nature and Analysis of Political Risk • Political risk • The unanticipated likelihood that a business’s foreign investment will be constrained by a host government’s policies • Micro political risk analysis • Analysis directed toward government politics and actions that influence selected sectors of the economy or specific foreign businesses in the country • Macro political risk analysis • Analysis that reviews major political decisions likely to affect all enterprises in the country

  4. The Nature and Analysis of Political RiskMacro Risk • Macro risk issues • Freezing the movement of assets out of the host country • Placing limits on the remittance of profits or capital • Devaluing the currency • Appropriating assets • Refusing to abide by the contractual terms of agreements previously signed with MNC • Industrial piracy (counterfeiters) • Political turmoil • Government corruption

  5. Select Countries in the 2012 Transparency International Corruption Perceptions Index

  6. The Nature and Analysis of Political RiskMicro Risk • Micro risk issues • Some MNCs are treated differently than others • Industry regulation • Taxes on specific types of business activity • Restrictive local laws • Impact of WTO and EU regulations on American MNCs • Government policies that promote exports and discourage imports

  7. The Nature and Analysis of Political RiskTerrorism and Its Overseas Expansion • Terrorism • The use of force or violence against others to promote political or social views • There are three types of terrorism • Classic • Amateur • Religiously motivated • MNCs are disinclined to set up operations in countries with high terrorism risk • MNCs must assess political risk, install modern security, compile crisis plans, and prepare employees for possible situations.

  8. The Nature and Analysis of Political Risk Analyzing Expropriation Risk • Expropriation • The seizure of businesses by a host country with little, if any, compensation to owners • Greatest risk: extractive, agricultural, infrastructural industries • Indigenization laws • Require nations to hold a majority interest in an operation

  9. Managing Political Risk and Government Relations • A comprehensive framework can help companies manage their political risk. • There are three basic categories of political risks • Transfer risks • Operational risks • Ownership control risks

  10. A Three-Dimensional Framework for Assessing Political Risk

  11. A Comprehensive Framework Political Risks • Transfer risks • Government policies that limit the transfer of capital, payments, production, people, and technology in and out of country • Tariffs on exports and imports • Restrictions on exports • Dividend remittance • Capital repatriation

  12. A Comprehensive Framework Political Risks • Operational risks • Government policies and procedures that directly constrain management and performance of local operations • Price controls • Financing restrictions • Export commitments • Taxes • Local sourcing requirements

  13. A Comprehensive Framework Political Risks • Ownership control risks • Government policies or actions that inhibit ownership or control of local operations • Foreign-ownership limitations • Pressure for local participation • Confiscation • Expropriation • Abrogation of proprietary rights

  14. A Comprehensive Framework General Nature of Investment • Conglomerate investment • A type of high-risk investment in which goods or services produced are not similar to those produced at home; high risk • Vertical investment • The production of raw materials or intermediate goods that are to be processed into final products; risk of being taken over by the government • Horizontal investment • An MNC investment in foreign operations to produce the same goods or services as those produced at home; not likely to be takeover targets

  15. A Comprehensive Framework Special Nature of Investment • Three sectors of economic activity • Primary sector: agriculture, forestry, mineral exploration and extraction • Industrial sector: manufacturing • Service sector: transportation, finance, insurance, and related industries

  16. A Comprehensive Framework Special Nature of Investment • The special nature of foreign direct investment can be categorized as one of five types (see Figure 10-1, slide 12) • Type I: highest-risk venture (type V is lowest) • The risk factor is assigned based on sector, technology, and ownership • Primary sector industries usually have highest risk factor, service sector industries have next highest; industrial sector industries have lowest • Firms with technology that is not available to the government should the firm be taken over have lower risk than those with technology that is easily acquired • Wholly owned subsidiaries have higher risk than partially owned subsidiaries

  17. A Comprehensive FrameworkQuantifying Political Risk • Some firms try to quantify political risk as part of their effort to manage it • Each variable is given a minimum or maximum score; scores tallied for overall evaluation of risk • Factors typically quantified • Political and economic environment • Domestic economic conditions • External economic conditions

  18. Criteria for Quantifying Political Risk continues

  19. Criteria for Quantifying Political Risk

  20. Techniques for Responding to Political Risk • Three related corporate political strategies • Relative bargaining power analysis • The MNC works to maintain a bargaining power position stronger than that of host country • Integrative, protective, and defensive techniques • Integrative techniques help overseas operation become part of host country’s infrastructure • Developing good relations with host government and other local political groups • Producing as much of product locally as possible with use of in-country suppliers and subcontractors • Creating joint ventures and hiring local people to manage and run operation • Doing as much local R&D as possible • Developing effective labor-management relations

  21. Relative Bargaining Power over Time

  22. Techniques for Responding to Political Risk • Protective and defensive techniques discourage the host government from interfering in operations • Doing as little local manufacturing as possible and conducting all research and development outside the country • Limiting responsibility of local personnel and hiring only those who are vital to operation • Raising capital from local banks and the host government as well as outside sources • Diversifying production of the product among a number of countries

  23. Techniques for Responding to Political Risk • Proactive political strategies • Broadly, strategies may include leveraging bilateral, regional, and international trade and investment agreements, drawing on bilateral and multilateral financial support, and using project finance structures to separate project exposure from overall firm risk. • Other strategies: • Formal lobbying • Campaign financing • Seeking advocacy through the embassy and consulates of home country • Formal public relations and public affairs activities such as grassroots campaigning and advertising • Political interventions designed to shape and influence political decisions prior to impact on firm

  24. Use of Integrative, and Protective-Defensive Techniques by Firms in Select Industries

  25. Managing Alliances • Some partners may be current or former state-owned enterprises; others may be controlled or influenced by government agencies. • MNCs must manage the relationships inherent in their alliances with other organizations including current or former state-owned enterprises. • Alliance and joint ventures can significantly improve the success of MNC entry and operation, especially in emerging economies. • Managing the relationships inherent in alliances, especially when governments are involved, can be especially challenging.

  26. Managing AlliancesThe Alliance Challenge • Motivating factors • Faster entry and payback • Economies of scale and rationalization • Complementary technologies and patents • Co-opting or blocking competition • Alliances are an arena where both value-claiming activities and value-creating activities take place. • Value-claiming: competitive, distributive negotiation • Value-creating: collaborative, integrative negotiation

  27. Managing AlliancesThe Alliance Challenge • Preparation for likely eventual termination of alliance • Legal issues • Conditions of termination • Disposition of assets and liabilities • Dispute resolution • Distributorship ownership • Protection of proprietary property • Sales territory rights • Obligations to customers • Business issues • Basic decision to exit • People-related issues • Relations with the host government

  28. Managing Alliances The Role of Host Governments in Alliances • Having alliance or joint-venture partners may be advantageous to MNC entry and expansion. • Highly regulated industries such as banking, telecommunications, and health care • Cope with emerging markets environments characterized by arbitrary and unpredictable corruption • May be required by host government • Host government may be unwilling to permit alliance to terminate. • Host governments have a substantial role in the terms under which alliances are initially formed, the way in which they are managed, and even the terms of their dissolution.

  29. Review and Discuss • What types of political risk would a company entering Russia face? Identify and describe three. What types of political risk would a company entering France face? Identify and describe three. How are these risks similar? How are they different? • Most firms attempt to quantify their political risk, although without specific weights. Why is this approach so popular? Would the companies be better off assigning weights to each of the risks being assumed? Defend your answer.

  30. Review and Discuss • How have terrorism impacted foreign interest in Iran and Saudi Arabia, considering the vast oil reserves that are there? How have terrorist attacks affected political relationships between countries such as the United States and Russia? • If a high-tech firm wanted to set up operations in Iran, what steps might it take to ensure that the subsidiary would not be expropriated? Identify and describe three strategies that would be particularly helpful. How might proactive political strategies help protect firms from future changes in the political environment?

  31. Review and Discuss • What are some of the challenges associated with managing alliances? How do host governments affect these?

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